Caregivers gladly give of themselves, and of course when their duty is done, want to play while they still can! This week, we look at a woman widowed two years ago by her beloved husband’s prolonged illness.
The Situation
Judith lost her husband after 47 years of marriage. The last few years of his life, she was his caregiver during his failing health. She wrote in to What’s The Plan to find out how to arrange her finances so she can visit her daughter and grandchildren on the East Coast, and travel with her new man friend to places on her bucket list while she herself has good health and companionship.
Judith and her late husband purchased rental property along the way, and she was able to maintain the accounting firm they had built together before he became sick. Her three rental properties in Denver are worth about $720,000, and net $14,000 per year of income.
She, unfortunately, made some poor investments and has $90,000 of carry-forward losses to offset most of the capital gains, if she sells the rentals. Her Parker home is worth about $1.2 million with a mortgage balance of $300,000 and a monthly payment of $1,850. She collects $2,019 in Social Security each month and she has an IRA worth $131,879.
Judith’s father took out a life insurance policy on her when she was a child. After considering $248,652 in loans against the policy, that cost $20,000 per year in interest, it has a surrender value of $162,277.
Judith has been considering surrendering the policy, but the potential taxes have her hesitating. If she surrenders it entirely, she’ll have to pay $24,000 in taxes, netting $138,000 to spend or invest.
Judith has been working for her accounting clients earning about $40,000 per year and also employs her sister providing an income to her of $37,000 per year. Judith has a sticky dilemma left to resolve if she retires, which is how to help her 59-year-old sister find gainful employment.
The Recommendations
Judith’s rentals are yielding about 2 percent of their value. She’s tired of dealing with renters and wants to be free to travel. The $700,000 invested in a conservative portfolio of 50 percent stocks and 50 percent bonds could give her a cash flow of $28,000 per year.
Judith just turned 70, and will now be required to withdraw about $4,700 per year from her IRA.
In her conversation with Pam, Judith couldn’t face selling her showcase home anytime soon. If she chooses to withdraw an additional $54,000 per year from the principal of her portfolio, which was built on her rental income, the money likely will run out in the next decade. She’ll then be forced to reduce her lifestyle drastically and use the equity in her home to replace the assets to live on from age 80 to 99.
We thoroughly discussed the risky nature of this decision because she may find that she needs more money later in life for health care and general living expenses. But Judith is willing to trade that possibility for some fun now. She’s comfortable with the idea of living on the surrendered cash value of her life insurance and equity in her home eventually as she doesn’t feel she owes her daughter an inheritance.
Since cash flow from Judith’s assets and future home sale will provide a comfortable income, she can simply allow her sister to run her business and continue to take a salary.
If her sister can sustain herself in the accounting business for another decade, she too will qualify for a comfortable Social Security income at age 70.
Combined, Judith can pull about $92,000 per year after tax, adjusting for inflation from current assets to enjoy now, and Social Security can keep paying the mortgage payment. She understands she’ll have to use the equity in her home later — a trade-off she’s willing to make.
Judith has been a faithful wife, mother and sister. We encourage her to pursue the fun and travel she’s never had time for. We look forward to receiving postcards from her world travels!
Pam Dumonceau has 23 years of experience and is the principal of Consistent Values, a registered investment advisory firm in Greenwood Village. What’s The Plan is not a substitute for financial planning or dedicated professional advice.
What’s your plan?
To ask Pam what you should do e-mail whatstheplan@consistentvalues.com to get advice. Names and identifying information are changed to protect confidentiality
